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Mispricing And Risk Taking In The Indonesian Stock Market

Author

Listed:
  • Zaafri A. Husodo
  • M. Budi Prasetyo
  • Rizky Luxianto
  • Theresia Silitonga
  • Januar Hafidz
  • M. Harris Muhajir
  • Inna Firindra

Abstract

This study aims to study macro-finance empirical connections within the framework of financial system stability (SSK) in Indonesia through market-based variables namely mispricing on the stock market, distress risk (PoD) of public companies and financial friction. This study uses alpha from the Fama-French 3-Factor Model through a rolling regression estimation to measure the period of mispricing. Distress-risk is measured using the Merton (1974) structural model according to the framework of Campbell, Hilscher and Szilagyi (2008). Meanwhile, financial friction is measured based on the difference between Return on Invested Capital (ROIC) and risk-free interest rates (Hall, 2013). The results of the market-based variables estimation have a significant relationship with the SSK indicator i.e the Financial System Stability Index (ISSK), credit growth and the Credit to GDP gap. In combination, mispricing, PoD and friction show information contributions above 50% of the SKK indicator. These findings indicate an empirical macro-finance connection. The results of robustness check show that distress risk as measured by probability of default firms provides additional information contribution of 18% to 41% on the SSK indicators and credit indicators. This is empirical evidence that shows one macro-finance connection path can be explained through distress risk of public companies.

Suggested Citation

  • Zaafri A. Husodo & M. Budi Prasetyo & Rizky Luxianto & Theresia Silitonga & Januar Hafidz & M. Harris Muhajir & Inna Firindra, 2018. "Mispricing And Risk Taking In The Indonesian Stock Market," Working Papers WP/28/2018, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp282018
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    More about this item

    Keywords

    macro-prudential; macro-finance; asset mispricing; Fama-French 3-Factor Model; Friction; Indonesian economy;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium

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